JM Financial Institution maintains a structural underweight position of almost 200 basis points on the information technology sector, despite a recent relief rally sparked by Tata Consultancy Services reporting results slightly ahead of expectations.
Venkatesh Balasubramaniam, MD and Head of Research at JM Financial Institution indicated that while short-term trading bounces may occur, the medium-term outlook remains negative.
“I don’t think the two problems that increasing setting up offices by GCCs in India, which has slowed down the growth in largecap IT, that changes in any way. The AI overhang continues to be there till we have an answer that what happens to the end game, it is very difficult to get very constructive on IT as a sector.
While short-term trading bounces may occur, the structural outlook for IT remains negative. The sector is one of the portfolio’s largest underweights, with the allocation nearly 200 basis points below the benchmark.
Within the banking, financial services and insurance (BFSI) space, the brokerage anticipates a subdued second quarter. Although BFSI companies account for roughly 45% of the Nifty weight, their incremental profit after tax contribution is projected at only 28%.
The firm’s model portfolio is overweight on non-banking financial companies (NBFCs) and underweight on banks by almost 400 basis points. NBFC growth is estimated at 36% for the quarter—mirroring the 37% seen after the first quarter—sharply outpacing the 11% growth anticipated for private sector banks and 1% for public sector banks.
Addressing the Reserve Bank of India‘s recent 25-basis-point rate hike and shift to a tightening cycle, the resulting negative impact on NBFCs is expected to flow through in financial year 2028 rather than the current financial year 2027.
The outlook for the segment remains positive, supported by 20% asset under management growth, 3% return on assets, and 15% profit growth. Preferred NBFC picks include AB Capital, Cholamandalam Finance, and PNB Housing Finance, while Axis Bank stands out as a strong preference among private lenders.
On the capital goods and artificial intelligence infrastructure front, the domestic focus is firmly on data center expansion. This massive build-out is viewed as a structural story, bolstered by government tax incentives introduced a year to a year and a half ago. Weaker-than-expected earnings from US AI firms such as Anthropic are not projected to impact India’s data center investments.
Companies operating in this theme hold very strong order backlogs and are expected to deliver extremely robust quarterly numbers, presenting a strong area for investment.
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JM Financial maintains structural underweight on IT, favours NBFCs over banks
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